Welcome to VIPsight Africa - Kenya
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| Pamela Akivaga |
9 October 2012
Safeguarding directors’ fiduciary duty to shareholders: Kenya
The fiduciary duty of directors is at the very heart of Corporate Governance. It implies a duty of loyalty, requiring directors to act solely in the best interest of the shareholders, avoiding conflicts of interest, self dealing and any abuse of position for personal advantage. A fiduciary duty also entails a duty of care, which presumes that directors have specific knowledge, skill and expertise which qualifies them to govern the company and must use this expertise avoiding recklessness for the benefit of shareholders.
In 2011, the Kenyan Capital Markets Authority suspended CMC Holdings Limited from trading and commissioned an independent investigation into the affairs of the company following allegations of misconduct by the company’s directors. The investigations revealed that the directors were indeed guilty of violating the capital market’s legal and regulatory requirements and breaching their fiduciary duties to shareholders. Their “indiscretions” included (amongst others) self-dealing transactions such as operating off shore arrangements to their own benefit, providing false information to the public and failure to exercise effective oversight over the management of the Company resulting in weak internal controls on the operations of the Company.
In August 2012, the Kenyan Capital Markets Authority banned seven directors of CMC from ever sitting on the Board of any listed company in Kenya. The directors are required to restitute the company and pay a penalty amount equivalent to two times the amount of the benefit accruing to them by virtue of their violations. In meting out this stern enforcement action against the directors, the Chairman of the market regulator reiterated the significance of sound corporate governance practices and quoted the words of Mr. Arthur Levitt, Former Commissioner of the US Securities and Exchange Commission – “If a country does not have a reputation for strong corporate governance practices, capital will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital will flow elsewhere”.
One can only hope that this enforcement action remains an effective reminder to directors that the market regulator is not a toothless dog; therefore, directors have no leeway to disregard their fiduciary duty to shareholders.
The complete report and resolutions of the Capital Markets Authority with regard to this matter can be found at: http://www.cma.or.ke/index.php?option=com_content&view=article&id=278:cma-takes-stern-action-on-cmc-holdings-ltd-past-and-current-directors&catid=14&Itemid=232
VIPsight Archives Africa - Kenya
2011
22 May 2011
Corporate Governance Watch: Insider Trading
Insider trading is a blatant violation of the Principles of Corporate Governance. Internationally accepted corporate governance standards call for equal disclosure and equal treatment of shareholders, however, the fundamental characteristic of insider trading means that there is an asymmetrical flow of information with some stakeholders having the advantage of being privy to information which has not bee revealed to other stakeholders.
Under the Kenyan Capital market legislation, Insider Trading is a criminal offence provided for under the Capital Markets Act. Section of the legislation clearly prohibits any person from dealing in securities if they have for the preceding six months been connected to a company and because of that connection has information that is not generally available to the public but, if it were, would be likely have a significant impact on the price of those securities.
The first insider trading charges to be instigated in Kenya were in 2008. This was a landmark year for the Kenyan capital market when the market regulator investigated possible insider trading involving the shares of a retail supermarket chain, Uchumi Limited and recommended to the Attorney General the prosecution of Mr. Bernard Kibaru and Terence Davidson. Mr. Terrence Davidson was the Chief Executive Officer of Kenya Commercial Bank, the company’s bankers, was accused of being privy to confidential information on the financial status of the company when he instructed his stockbroker to sell 300,000 Uchumi Limited shares just a few days before the retail supermarket chain collapsed. The same allegation was made against Mr. Bernard Kibaru, who at the time was a senior executive at the company and who disposed off his shares in the company just a few days before it collapsed.
Stakeholders and observers were optimistic about the success of the case which would be a landmark win in the 56 year history of the country’s stock exchange. However, the court gave judgement in favour of the defendants highlighting that the company’s Information Memorandum clearly showed that the company was making losses and was technically insolvent and the losses were a fact known to the public. One can only speculate that the court court’s decision must have been deeply disappointing to the market regulator and the entire prosecutorial team However, the court case sends out a clear message that the regulator will not idly stand by while insiders profit at the expense of other shareholders. The regulator is on high alert and perhaps the next prosecution against insiders in the stock market will yield a positive outcome.
8 April 2011
Corporate Governance Watch: Demutualization of the Nairobi Stock Exchange for better Corporate Governance
In 1954, the Nairobi Stock Exchange, the country’s only securities exchange was established through registration as a voluntary association of stockbrokers under the Societies Act and was subsequently incorporated as a company limited by guarantee. Like a number of other securities exchanges around the world, the Nairobi Stock Exchange is a mutual exchange owned by its members who acquire such membership by owning seats on the exchange.
Over the years, the Nairobi Stock Exchange has been criticized for inadequate corporate governance standards and poor performance as an Exchange. Amongst the specific concerns is the current ownership and directorship structure where a significant number of the directors of the Nairobi Stock Exchange are stock brokers and ownership is pegged to trading privileges. There is an inherent conflict of interests between the owners, the members and the management and subsequently, the capacity of the Nairobi Stock Exchange to adequately supervise and enforce international corporate governance standards in listed companies and market intermediaries has been questioned. Cognizant of this vulnerability in the Kenyan Capital Market, the Minister for Finance established the Demutualization Steering Committee with members from the Capital Markets Authority, the Nairobi Stock Exchange, the Ministry of Finance, the Attorney General’s office, the Central Bank of Kenya and investment and legal experts to spearhead the process of demutualization of the Nairobi Stock Exchange.
Demutualization is the process by which the legal status of an exchange (securities or commodities) is converted from a non-profit, member-owned organization (mutual association) to a for-profit, shareholder owned corporation. The process has been undertaken by leading exchanges around the world including the Amsterdam Exchange, Australian Stock Exchange (ASX), the Deutsche Börse, the Toronto Stock Exchange, the India and Johannesburg Stock Exchanges amongst others. Arguments for demutualization include its impact on corporate governance. In the Kenyan situation for instance demutualization would restructure the governance at the Nairobi Stock Exchange, by separating ownership rights from trading rights, board appointments would be by the shareholders of the exchange rather than by appointment on the basis of membership to the exchange.
Under the proposed law to facilitate the Demutualization of the Nairobi Stock Exchange, the board of directors will be appointed by the shareholders. This is in line with international corporate governance standards and makes one more optimistic that the resultant board will be a representative board comprised of individuals who have the knowledge, capacity, skill, experience and expertise to take decisions that are in the best interest of the stock exchange, relevant stakeholders and the market as a whole and not merely for the benefit of the individual interests groups and member companies which the directors might feel they have the obligation to represent. The Nairobi Stock Exchange has made an application to the Capital Markets Authority for its demutualization and all stakeholders, observers and critiques anxiously wait to see if the process will result in a securities exchange with world class corporate governance standards that can be emulated by the companies that are listed on it.
31 January 2011
Responsible Investing?
Corporate Social Responsibility has over the past few years become a significant issue of discussion and action by major corporate entities and great significance is placed on Responsible Investing by multinational companies and institutional investors.
In this regard, the OECD came up with voluntary principles and standards for responsible business conduct, namely: The OECD Guidelines for Multinational Enterprises. The Guidelines aim, amongst other things, to strengthen the basis of mutual confidence between enterprises and the societies in which they operate and to enhance the contribution to sustainable development made by multinational enterprises. The United Nations Principles for Responsible Investment (UNPRI) which lay down six (6) for Responsible Investment by Institutional Investors to encourage them to remain cognizant of environmental, social and governance (ESG) issues when making investment decisions. The guidelines and the principles are however, not legally enforceable.
Consider the case of investments in Agribusiness in developing countries. Some call it land grabbing, while others call it corporate colonialism, the point is, whatever you choose to call it, institutional investors and multinational companies are spending millions of dollars each year to invest in the acquisition of land for Agribusiness. Taking this into consideration, one must ask whether institutional investors and multinational corporations consider the principles of Responsible Investment when they invest in Agribusiness in developing countries.
Dominion Farms Limited in Kenya comes to mind. The entrance of the American owned company into the Yala Swamp region in Kenya in 2003 was wrought with uproar and resistance by the local communities. The company acquired 17,000-acre leasehold in western Kenya land from the indigenous people in order to carry out an ambitious commercial farming project. Local communities protested not only the expropriation of their land, but also the destruction of vegetation, the natural habitat, interruption of their socio-economic activities and the contamination of the water in the Yala River by chemicals and fertilizers used on the farms.
The company on its part argued that its investment in the area was a blessing for the people and alluded to the fact that it would be pointless preserve culture if the people were starving. The residents however contended that they had been surviving for many years on subsistence farming and should be allowed to continue to do so. Which of these arguments is viable? Should indigenous communities accept “economic development” at the expense of cultural heritage and environmental conservation? On the one hand, it can be argued that poverty reduction and technological enhancements are required to make developing countries more competitive in the global market, yet on the other hand, expropriation of land, destruction of natural habitats, pollution and disregard for the local cultural practices seems like a very high price for such development.
All arguments notwithstanding, Responsible Investment, specifically with regard to the impact of investment projects on the culture of local communities in developing and emerging markets is complex and multifaceted and it is, in my opinion, an area that should command closer attention by the international investment community.
11 August 2010
Diversity on boards: Gender Diversity on Kenyan Boards
Publicly listed countries in Kenya, like many other countries around the world struggle with issues relating to diversity on the board of directors. Diversity includes issues such as race, age, gender and ethnicity and although a number of studies have shown that diversity on boards makes good business sense, it is in many instances not translated into practice.
The two concepts of diversity that are perhaps the most pronounced in the boards of companies publicly listed in Kenya are ethnicity and gender diversity. It is perhaps for this reason that the Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya specifically provide that the process of the appointment of directors should be sensitive to gender representation, national outlook and should not be perceived to represent single or narrow community interest.
It is perhaps important to note that a prescriptive and a non-prescriptive approach was taken in adopting the above guidelines and listed companies are of necessity required to meet certain minimum standards of good governance. Such standards are also set out in the continuing obligations for public listed companies in the Capital Markets (Securities)(Public Offers, Listing and Disclosure) Regulations, 2002, unfortunately, the requirement for board diversity, is not one of the mandatory requirements to be met by companies. This is a matter which is left at the discretion of the various companies and as a consequence, the representation of women on the boards of listed companies in Kenya is negligible at best.
So then, where are the women on Kenyan boards? Many argue that like many other jurisdictions, Kenya has historically and culturally been a patriarchal society where men have been expected to take charge of not only the household but business enterprises as well. However, in recent times, there has been a conscious effort to move away from patriarchy in business and embrace a deeper participation of women in business and more so as leaders on boards. Unfortunately, judging from the prevalent situation in Kenya and other jurisdictions, this may be easier said than done. For instance, Norway, which currently boasts of a 44% rate of women on the boards, did not reach such an impressive level by voluntary action by the respective companies, but rather by compulsory legislation in 2006 requiring that at least a representation of at least 40% of boards women on the boards of public companies.
There are varying opinions and standpoints on this matter. Some people argue that regulatory bodies have no place legislating boardroom matters while others believe that public companies would benefit from having women on their boards, even if it means enacting legislation in support of affirmative action. The jury is still out on whether the compulsory legislation in Norway has been a success or a failure and while various jurisdictions appear to advocate for an “observe first and adopt later” stance, I believe that Kenya would benefit immensely from legislation in support of women on the boards of listed companies.
While Kenyan regulators may not want to set strict thresholds for representation by women, it may be prudent to have laws in place legislation requiring at least some female representation on boards to begin transitioning out of the current situation where the boards where a majority of public companies are 100% male dominated.
12 June 2010
Electronic Communication with investors and shareholders
Communication by issuers to investors and shareholders is fundamental to good corporate governance. Companies are not only responsible for disclosing information to their shareholders, but also ensuring that the said information is received by the respective shareholders.
In Kenya, the practice for issuers with regard to notices of meetings and annual financial statements to shareholders has been the publication and distribution of hard copies of the said documents. However, as technology in Kenya and other developing and emerging markets continues to evolve, more and more investors and shareholders have access to various forms of electronic communication, including the use the Internet. These are perhaps the circumstances that prompted the amendment of the Companies Act in 2008 to allow companies to give notice of annual general meetings and circulate their annual financial statements and auditors reports to members through electronic means as well as the publication of the said notice and a summary of the annual financial statements and auditors report in two local dailies of national circulation.
Many companies listed on the stock exchange appear to be embracing the possibility of electronic and internet based communication arguing that not only is it cost effective and expeditious but also an efficient means of shareholder communication. That electronic communication is cost effective and expeditious is not in question, but in the prevailing Kenyan situation, the efficiency of electronic communication is a subject for debate. What constitutes efficient communication? Is such efficiency measured solely by the speed and volume of information sent out, or is it also measured by an assessment of whether the information sent out is easily accessible and widely received? While one can argue that the persons who make use of and benefit from annual reports and financial statements are the institutional investors and seasoned shareholders who will have no trouble in accessing communication via electronic means, that does not form a justifiable reason to limit the number of investors and shareholders who actually receive the information because they have no access or have limited access to the internet or other forms of electronic communication.
While as a country we do not wish to appear stagnant or even retrogressive in the adoption of new technology, two important factors should be considered, first, are Kenyan shareholders and investors ready to adopt a culture of communication by electronic means and second can the Kenyan communication infrastructure as it currently stands allow for efficient electronic communication with shareholders? The jury is perhaps still out on the first question but with regard to the second, the answer is no, Kenya still has miles to walk before we can successfully implement electronic distribution and disclosure of information. But until then, shareholders reserve their right to receive information through media that is readily accessible to them.
May 2010
KENYA: CORPORATE GOVERNANCE WATCH
In 2002, the Capital Markets Authority issued Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya for observance by companies listed on the Nairobi Stock Exchange in order to enhance corporate governance practices by such companies, promote the standards of self-regulation so as to bring the level of governance in line with international trends.1
The guidelines are voluntary and listed companies are required to ‘comply or explain’ and with effect from the financial year ended 2002, public listed companies were required to disclose on an annual basis in their annual reports whether the company was complying with the guidelines on corporate governance and also to disclose the extent of non-compliance their non disclosure.
Following the issuance of the above guidelines, the Capital Markets Authority monitors the compliance of listed companies with certain key corporate governance requirements. The compliance status from 2003 to 2008 is presented below.
Report on compliance status by listed companies
Source: Annual Reports of the Capital Markets Authority
ICPAK: Institute of Certified Public Accountants of Kenya (the oversight and certification body for accountants and auditors in the country).
ICPSK: Institute of Certified Public Secretaries of Kenya (the oversight and certification body for company secretaries).
The number of listed companies includes both issuers of equity securities and corporate bonds.
1 (See Guidelines on Corporate Governance Practices by Public Listed Companies in Kenya; accessible on www.cma.or.ke)
2003
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Corporate governance guideline |
Total number of listed companies |
Listed companies in compliance |
| 1. |
Establishment of board committees |
48 |
21 |
| 2. |
Detail disclosure of director’s remuneration in annual report |
48 |
38 |
| 3. |
Ownership details of the top ten shareholders |
48 |
9 |
| 4. |
Timely release and submission of audited accounts |
48 |
22 |
| 5. |
Timely submission of interim reports |
48 |
37 |
2004
|
|
Corporate governance guideline |
Total number of listed companies |
Listed companies in compliance |
| 1. |
Establishment of board committees |
52 |
48 |
| 2. |
Sufficient board composition |
52 |
42 |
| 3. |
Detail disclosure of director’s remuneration in annual report |
52 |
22 |
| 4. |
Ownership details of the top ten shareholders |
52 |
35 |
| 5. |
Timely release and submission of audited accounts |
52 |
43 |
| 6. |
Timely submission of interim reports |
52 |
49 |
| 7. |
Chief Finance Officers in good standing with ICPAK |
52 |
24 |
| 8. |
Company Secretary in good standing with ICPSK |
52 |
52 |
2005
|
|
Corporate governance guideline |
Total number of listed companies |
Listed companies in compliance |
| 1. |
Establishment of audit committees |
52 |
50 |
| 2. |
Sufficient board composition |
52 |
44 |
| 3. |
Detail disclosure of director’s remuneration in annual report |
52 |
26 |
| 4. |
Ownership details of the top ten shareholders |
52 |
45 |
| 5. |
Timely release and submission of audited accounts |
52 |
49 |
| 6. |
Timely submission of interim reports |
52 |
50 |
| 7. |
Chief finance officers in good standing with ICPAK |
52 |
39 |
| 8. |
Company Secretary in good standing with ICPSK |
52 |
52 |
2006
|
|
Corporate governance guideline |
Total number of listed companies |
Listed companies in complianc |
| 1. |
Establishment of board committees |
53 |
36 |
| 2. |
Sufficient board composition |
53 |
38 |
| 3. |
Disclosure of a statement on corporate social responsibility in the annual report |
53 |
30 |
| 4. |
Ownership details of the top ten shareholders |
53 |
49 |
| 5. |
Timely release and submission of audited accounts |
53 |
47 |
| 6. |
Timely submission of interim reports |
53 |
41 |
| 7. |
Chief finance officers in good standing with ICPAK |
53 |
42 |
| 8. |
Company Secretary in good standing with ICPSK |
53 |
53 |
2007
|
|
Corporate governance guideline |
Total number of listed companies |
Listed companies in complianc |
| 1. |
Establishment of board committees |
57 |
45 |
| 2. |
Sufficient board composition |
57 |
42 |
| 3. |
Disclosure of a statement on corporate social responsibility in the annual report |
57 |
44 |
| 4. |
Ownership details of the top ten shareholders |
57 |
44 |
| 5. |
Timely release and submission of audited accounts |
57 |
50 |
| 6. |
Timely submission of interim reports |
57 |
5 |
| 7. |
Chief finance officers in good standing with ICPAK |
57 |
43 |
| 8. |
Company Secretary in good standing with ICPSK |
57 |
57 |
2008
|
|
Corporate governance guideline |
Total number of listed companies |
Listed companies in compliance |
| 1. |
Establishment of board committees |
60 |
43 |
| 2. |
Sufficient board composition |
60 |
49 |
| 3. |
Disclosure of a statement on corporate social responsibility in the annual report |
60 |
36 |
| 4. |
Ownership details of the top ten shareholders |
60 |
49 |
| 5. |
Timely release and submission of audited accounts |
60 |
47 |
| 6. |
Timely submission of interim reports |
60 |
41 |
| 7. |
Chief finance officers in good standing with ICPAK |
60 |
|
| 8. |
Company Secretary in good standing with ICPSK |
60 |
53 |